New indicators on the economy present positive outlook for the economy. They include the gradual inflation decline, growth in Gross Domestic Product (GDP), narrowing gap between the official and parallel market exchange rates and clearance of over $7 billion FX backlogs to mention but a few. All happening within the first year of Olayemi Cardoso’s leadership at the Central Bank of Nigeria (CBN). Financial analysts and experts have assessed these milestones and came up with a summary verdict that under his leadership, better days are ahead for the economy.
Olayemi Cardoso assumed the leadership of the Central Bank of Nigeria (CBN), at a time key economy indicators were pointing southwards. The economy faced a stock pile of debts in excess of $108.2 billion, maturing obligations, misaligned currency with over N22 trillion printed bank notes stoking inflation, high interest rates, Foreign Direct Investment (FDI) draught and acute dollar shortage.
The debilitating and lingering effect of the CBN-led naira redesign policy and subsequent naira cash crunch had put the GDP figures in disarray.
The oil sector, which contributes more than 50 per cent of government revenue and over 80 per cent foreign exchange earnings shrank. The deterioration in the sector’s performance was primarily as a result of lower oil production due to persistent oil theft, pipeline vandalism, and force majeure, negatively impacted dollar inflows that worsened naira instability.
Task of turning around the economy
Revamping the economy and turning the above negative economic indicators around within his first one year in office was by no means a simple task.
Against all odds, Cardoso courageously started series of bold reforms many considered long overdue. The reforms were unveiled and their implementation took off immediately including exchange rate unification.
Unified exchange rate
Exchange rate reforms directed by President Tinubu saw Cardoso unifying all multiple rates into the Investors and Exporters (I&E) forex window.
That policy required that all applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, and SMEs would continue to be processed through the I&E window. The operational changes to the foreign exchange market also include the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the exchange rate unification policy was bold and courageous. He said it is expected that the benefits of the forex reforms will crystalise later.
He said: “Exchange rate management goes beyond exchange rate unification. It must address issues surrounding market structure, easy access and adequate supply. This means effectively dismantling forex rationing, administrative controls, and reviewing import restrictions.”
Despite its numerous setbacks, Rewane insisted that the current exchange rate framework has brought about transparency in the forex market, reduced exchange rate misalignment and transaction costs, and opened the economy to offshore investors.
Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, said that Cardoso has done fairly well in his first one year in office. Under his leadership, there has been remarkable improvement in corporate governance in the Central Bank of Nigeria. For me, I think that is very good, at least for purposes of restoring the credibility and integrity of the institution.
According to him there has also been much better stakeholder engagement, especially within the banking community that is between the apex bank and the banking community, and the level of communication has improved.
The level of communication has improved under the new regime of the Central Bank of Nigeria. The fact that one of the first things that is CBN did under Cardoso was to ensure the clearing of the foreign exchange backlog to the tune of $7 billion. That was very was very good, at least, to bring confidence back to the market. The liberalization of the market too, has helped a great deal, to encourage inflows of foreign exchange into the market.
However, the liberalisation has also brought a very serious consequence in terms of cost of production, cost of imports, high inflation and all of that because the economy is highly, highly sensitive to exchange rates movement.
So, the liberalisation of the market, particularly the floating of the currency, has had a serious effect on inflation, with many citizens and businesses are still struggling with that including the exit of many multinationals.
He said the administration has undertaken some very important corrective reforms which should be applauded. These were the commitment to exchange rate convergence and the removal of fuel subsidy. These were inevitable reforms necessary to fix damaging distortions in the economy.
He said: “Admittedly, these reforms had inflicted considerable pains on the citizens. We have seen intense inflationary pressures, spiking operating costs for businesses and severe negative impact on citizens welfare. The severity of the impact was beyond expectations. This therefore underscored the imperative of an expeditious response from the administration to address the social outcomes of the reforms. The government ought to have acted much faster”.
Expanding FX sources
The CBN, under Cardoso, is also working with the Federal Government to address the current dollar scarcity and shore up the naira.
“For instance, Nigeria’s source of funds from the diaspora, Nigerians living and working abroad who have families here and who are interested in keeping a presence here. We have to encourage them to save in Nigeria perhaps by improving payment mechanisms.”
Way forward by stakeholders
Yusuf advised the CBN to define the extend of ongoing market approach in managing monetary policy, because this is a different economy from other adverse economies. The market structures here are not so mature, given the imperfections in the Nigerian financial markets.
“So, all of these things need to be taken into account in the adoption of some of market models in managing our financial system. We need to recognize the reality of what you call market failure in economics and make appropriate provisions to correct them. We cannot afford to submit or to expose the market completely to market forces,” he advised.
Continuing, he said: “As we progress with the reform in the in the financial markets, we should learn lessons from the outcomes for the reforms, where the consequences have been very, very serious, we have to go back to the drawing board and re-calibrate the reforms,” he said.
Yusuf said the CBN has since this administration been very aggressive in monetary policy tightening, resulting from the commitment of the CBN governor to inflation targeting again.
He cautioned that the apex bank should define the boundaries for this monetary policy tightening, because clearly, monetary policy alone cannot solve the problem of inflation.
He further called for more collaboration between the fiscal and monetary authorities, because so far, the interest rate has been driven too high.
He said the latest MPR is astronomical and that will have a very, very adverse effect on growth, and investment. And this is already putting a lot of burden of debt service, of many corporate organizations that are indebted to the banks.
“So, there is need for us to review the piece at which the CBN has been tightening monetary policy. Nigeria is a developing economy that requires a lot of support in terms of financing. And this is not exactly credit-driven economy such as we have in US and Europe, where you can use the instrumentality of interest rate hike to be able to tame inflation,” he said.
The CBN needs to trade softly with the tightening of monetary policy, and needs to, you know, do a lot more with development finance. “That is true that under the previous administration, the intervention funds were abused. There were all sorts of issues with this, but we can modify it.
“We should not throw away the baby with the bath water. This economy needs low-cost funding for real estate, for manufacturing, for agriculture, for solid minerals, for infrastructure investment, you know, for agricultural investment, all of these things cannot, be funded with the commercial bank funds, which is going for at over 30% and we don’t want to disconnect these critical sectors from the financial system,” he advised.
“So, the CBN needs to do a lot more to ensure that you have a robust development finance window to give no cost facility, single digit and long-term funds to the receptor of the economy. Those are the things I think we need to do, and the CBN should please address,” he advised.
“As part of recognising the peculiarities of our environment, we should fix the customer duty exchange rate at a maximum of, you know, N1,000 to the dollar. We can review that maybe annually or by annually,” he added.
President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said: “I congratulate him personally and on behalf of the entire CBN-licensed BDCs. He inherited significant foreign exchange volatility, premium gap, lower buffers and introduced different raft measures including recapitalisation, liberalisation and open market-driven policies that are still under analysis.”
Previously, he said the opening up of the diaspora remittances collection points to more players will deepen dollar inflows to the economy.
“I advise the president to ensure that Nigeria’s forex sources are diversified through the grant of an autonomy to the BDCs to be readmitted into the frame and legislation of the apex bank foreign exchange policies as agents of Diaspora remittances and cash imports through the banks,” he said.
Former Registrar, Chartered Institute of Bankers of Nigeria (CIBN), and President, Bank Customers Association of Nigeria, Uju Ogubunka said the government should listen more to the people.
Ogubunka advised government to re-consider, and re-evaluate the policies that have been taken, and tamper them to get to where we want to.
He said the stability in the financial system is a good development that should promote growth and trust in the sector.
Other analysts said recapitalization of banks under Cardoso has progressed well with four commercial banks with international licenses – Fidelity Bank Plc, Access Holdings Plc, Guaranty Trust Holding Company (GTCO) Plc and FCMB Group Plc – which altogether needed to increase their capital base to $1.23bn, have made significant strides to secure the funds.
The first cluster of offers came as Cardoso said the recapitalisation will produce resilient and fit-for-purpose banks with more ability to grow the economy.
They said that banks recapitalisation will further strengthen the financial system and make it robust to be able to withstand economic headwinds.
Overall, the recapitalisation exercise embarked upon by the CBN leadership presents great opportunities for banks and the economy to grow, including taking the economy to $1 trillion mark as projected.
.Akintunde, a financial analyst, writes from Abuja
